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Mr Market plays us all for chumps

by Aaron McCormack on June 12, 2012

If you are an “average punter” in the European periphery, the chart above tells you all you need to now about who the winners and losers will be as the Euro crisis plays out.  Simply put, those who can are moving their money out of the countries that they think may leave the Euro, and thus devalue.    The chart shows that in the past 18 months, significant amounts of money have been leaving bank accounts in Portugal, Italy, Spain, Belgium, Greece and Ireland. (the French number is large in absolute terms, but not so much in relative terms given the size of the economy).

The “creditor” countries such as Germany and Finland, as well as other economies like Switzerland and even the USA are the beneficiaries of these flows of funds.

If you are managing money, and have the sophistication to do this, you will want to keep your Euros somewhere like Germany.  If the Eurozone does suffer a shock, like a Spanish default or a Greek exit, the “German Euro” will rise over the long run, not fall.  Shedding weaker countries would see the Euro behave more like a Deutschmark – perhaps rising to as much as €2 to the US Dollar.  Alternatively, you can move your money to a perceived safer-haven like Switzerland.  The Swiss central bank is charging negative interest rates because these currency inflows are driving the Swiss Franc through the roof, making Swiss goods very expensive to buy and making Switzerland a very expensive place to visit.  Even with its poor economic fundamentals, people are even clamouring to lend money to the US government for a miniscule return of just over 1%.

If your money is in Greece or Ireland and, overnight, is revalued at €1 to one Irish punt-nua or one Greek New Drachma, then within hours of the next market open you will see the real-world value of those savings ripped in half, if not worse.  That is why this money is leaving those countries.

Rich folks with money managers.  The financial services folks.  Hedge funds. Larger corporations.  These are the sorts of people who are able to protect themselves.  The average person in the street hasn’t the wherewithal to even begin to do this, assuming they are lucky enough at all to have some savings.

Does this mean that currency devaluation is a automatically a disaster for the citizens of periphery countries? After all, it is not very palatable to see your savings torn in half and to find that buying any good or service that needs to be imported will cost twice as much.

In posing this question, we have to consider the alternative – “a disaster compared to what?”

It reminds me of the tale of the frog and the boiling water.  A frog dropped suddenly into a pot of boiling water will immediately jump back out and survive.  A frog in a pot of cold water that is slowly brought to the boil will apparently not escape and boil to death.  Neither experience is likely much fun for the frog.  But this is what I mean about “better a horrible end than an endless horror.”

All the while we toy with this currency union issue, we are ignoring the vital work of restoring fundamental competitiveness and sustainability to Europe’s (the world’s?) beleaguered economies.  In insulating the financial services world from the consequences of the bubble-induced recession that they have precipitated, we fail to let markets do their work.  Part of that work is to separate chumps from their money when they make bad investment decisions.  That should happen to banks and governments as surely as it does happen to ordinary people.  We fail, we clean up the mess, we move on a bit wiser.  We think twice the next time…

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